Anti-European tide sets Britain's ruling party against Brussels

BIRMINGHAM, England (Reuters) - A bloodied figure climbed out of a coffin and lurched across the square screaming at passers-by, as three pale-faced women dressed as witches squawked and wailed.

"We are the zombie euro zone economies," they cried. "We are the walking dead. We are Greece, Spain and Ireland. Give us trillions, sir, of your money to help us. Do you feel the contagion ? Do you feel the disease?"

Welcome to this year's conference of Britain's ruling Conservative Party, where hostility to the European Union and to the euro currency has reached new heights.

Europe has never been popular among British Conservatives.

There is a tradition of resentment of Brussels, dating back to the era of Margaret Thatcher, who demanded and secured a rebate from the EU budget for Britain in the 1980s. Back in 1967, French President Charles de Gaulle accused Britain of a 'deep-seated hostility' towards the European project.

The strength of feeling today reflects a growing anti-Europe sentiment among a British public that is often ignorant of the fact the continent accounts for around half Britain's trade and is swayed by a government and media that routinely blame the euro zone for Britain's economic ills.

"I think there's been a very big change," said leading anti-Europe Conservative MP John Redwood. "Thirty years ago, many more Conservative MPs welcomed the European engagement of Britain but now euroskepticism is more fashionable, and fewer and fewer people buy into that level of engagement."

Few Conservative MPs defend Britain's current institutional relationship with Brussels. What divides them is how far to go in loosening it -- or whether to leave altogether.

The mood is forcing policy changes on Prime Minister David Cameron's government, already behind in opinion polls because of unpopular austerity policies which have cut public spending.

Seeking to capitalize on the anti-European mood, Cameron said on Tuesday he will seek to negotiate a "fresh and better settlement" for Britain with the EU at some unspecified future date, and then put that package to the country in a referendum.

"I'm neither in favor of out - leaving altogether - nor am I satisfied with the status quo," Cameron told BBC Radio in an interview at the conference. "I want to change the status quo."

Whether that will satisfy mutinous elements of his own party remains to be seen.

"The centre of gravity of the Conservative Party has shifted markedly towards euroskepticism," said David Heathcoat-Amory, a former Tory Minister for Europe who launched a pamphlet at the conference entitled "The UK and the EU: Cutting the Knot".

"The euro has failed," he said. "It has put a lot of people into poverty and fuelled civil unrest. They're on the back foot in Brussels because they made a catastrophic mistake...but they only have one response: give us more power."

Heathcoat-Amory wants a radically different relationship between Britain and the EU, under which London repatriates all powers given to Brussels, then decides on a case-by-case basis whether to adopt EU laws, while retaining the single market and free trade area so beloved by British business.

But even that doesn't go far enough for some Conservatives, who want to see Britain leave the EU altogether and then negotiate a free trade agreement with the bloc.

One of the best-attended fringe events at this year's conference was a meeting of the anti-EU Bruges Group, simply entitled: "How Britain Can Exit the EU."

Speaking at that event, economist Tim Congdon, who has advised previous British finance ministers and is now economics spokesman for the UK Independence Party (UKIP), called for a straight in-or-out referendum.

In a move intended to deflate UKIP's growing popularity, Cameron's Foreign Secretary William Hague has launched what he terms the most comprehensive review ever of the balance between European and British law-making. It will report in 2014 - one year before Britain's next general election.

Hague and Cameron remain vague about exactly what goals they seek in a renegotiation of British membership of the EU.

"The renegotiation and the popular mandate are fraught with existential risk for Mr Cameron's government," wrote Financial Times political columnist Janan Ganesh. "By hinting at a repatriation of powers, he raises euroskeptic hopes that are almost impossible to meet. Few diplomats expect to achieve more than cosmetic changes to the terms of British membership."

In another measure designed to please euroskeptics, Cameron announced on Sunday that he would veto a new European Union budget if it proposed big increases in spending.

"People do not like Europe," said Gideon Skinner, head of political research at pollster IPSOS-Mori. "We are seeing the highest anti-EU scores (in polling) since the 1980s."

Reflecting that mood, there is no EU stand at this year's conference. There are stands, however, devoted to two British colonies which represent the apotheosis of the island spirit: Gibraltar and the Falkland Islands. Inside the hall, visitors can sign a petition demanding a referendum on EU membership.

Simon Walker, head of the Institute of Directors business lobby group, believes the euroskeptics have won the argument. "Fifteen years ago, being anti-euro was intellectually unfashionable," he said. "It was seen as a bit xenophobic. But they have been proved right."

The dwindling band of Conservatives who want the party to engage more constructively in Europe make little secret of their frustration.

"Is the Conservative Party sufficiently engaged in Europe?," asks Richard Ashworth, head of the Conservative bloc in the European Parliament. "They have found Europe not to their liking. Conservative members can't see that Europe can provide solutions. You can't blame Europe for what went on in the City of London, or for the global recession."

His answer to the anti-Europeans who want Britain to treat Europe purely as a free trade zone is to point to what has happened to Norway, which is not an EU member but is part of the European Free Trade Association EFTA.

"They pay the equivalent of £70 per person per year to the EU for free trade and have no say in any of the rules governing it," he said. "That's not much less than we pay for full membership. And we get a say in setting the rules."

But with British officials talking about EU membership evolving from a single cohesive group into a series of interlocking Venn diagrams, it seems unlikely London will accept the status quo for much longer.

Or, as the pamphlets being handed out to conference attendees, put it: "Don't Feed The Euro Zombie Economies."